Default fights just getting started

Until America makes up its spending mind, we're in for constant debt drama

President Barack Obama, seated next to Hester Clark, president and chief executive officer of the Hester Group, speaks during a meeting with small business owners to talks about the government shutdown and debt ceiling, Friday, Oct. 11, 2013, in the Roosevelt Room at the White House in Washington. (AP Photo/Charles Dharapak)
— AP

President Barack Obama, seated next to Hester Clark, president and chief executive officer of the Hester Group, speaks during a meeting with small business owners to talks about the government shutdown and debt ceiling, Friday, Oct. 11, 2013, in the Roosevelt Room at the White House in Washington. (AP Photo/Charles Dharapak)
/ AP

With any luck, by the time you read this, Washington has reached a budget truce.

Pay no attention to this illusion of calm. The nation’s major fiscal struggles lie ahead.

The magnitude of our problem was rendered in alarming detail last month by the Congressional Budget Office in its yearly long-range outlook.

Lawmakers bought some time with the spending-cut deal that ended their 2011 standoff over raising the federal debt ceiling. Gradual economic recovery also has helped.

Federal deficits, which shot to 10 percent of the nation’s total economic output in 2009, will drift down to 2.1 percent of GDP by 2015, the CBO projects.

But deficits will start increasing again in 2016, as more baby boomers qualify for Social Security, Medicare and Medicaid.

Unless Congress acts decisively — and soon — autopilot increases in these politically popular “entitlements” will crowd out every other kind of federal spending, including defense, research, transportation and education.

Deficit spending over the past five years nearly doubled the nation’s debt load to 78 percent of GDP. In the 40 years before the 2008 financial crisis, federal debt averaged 38 percent of total output.

If Congress totters along its present path, in 25 years the level will reach 100 percent. Debt could soar to 156 percent of GDP under one CBO scenario.

The last time the nation ran up this kind of debt was 1946, for the purpose of winning World War II. Now we’re testing the kindness of lenders to support vast and growing entitlement systems.

Americans clearly like these programs. But to an economist, our present system reduces prosperity, because it transfers wealth from younger, healthy workers to non-working seniors with expensive medical problems, regardless of financial need.

The CBO warns that growing debt will strain the economy with higher taxes, crowd out private investment and raise the odds of a fiscal crisis as foreign investors demand higher interest payments.

Certainly, 25 years is a long way off. There’s plenty of time for a few government shutdowns and debt-ceiling dramas until rational adults regain control of Washington, right?

The case for patience is weak. True, bond markets have been relatively calm during our flirtation with history’s first-ever default, which the Treasury Department warns could happen by Nov. 1 if lawmakers don’t extend borrowing authority.

Still, there are signs of nervousness. Interest rates have soared on Treasurys that roll over at the end of October, and prices for insurance against default have crept higher.

Even a reasonably optimistic political scenario offers little comfort.

Let’s say lawmakers can strike a deal to keep borrowing for a few years in return for modest cuts to entitlements and broadening the tax base.

After all, the seeds of such a deal can be found in President Barack Obama’s budget proposal and the latest compromise plan from House Budget Committee Chairman Paul Ryan, R-Wisconsin.

But while Washington nibbles at the debt problem and resists a crash diet, the clock is ticking on the government’s ability to borrow.

Of the nation’s $17 trillion in debt, the financing cost is about 2 percent on the $12.6 trillion portion with interest-bearing bonds, according to an analysis by Scott S. Powell of the Discovery Institute.